Economic data releases
Economic data releases are information sets that describe activities in an economy. Typically they are in a time series format that covers, weeks, months, quarters or yearly statistics. Each economic data release will have its own format for how often it is released and at what times but they typically are pre-scheduled and released at the same time each release.
Economic data releases are something that is very important when it comes to moving the Forex market. These are regularly published by government agencies and central banks around the world. Every day, stocks, bonds and currencies fluctuate in response to and the expectations of new economic information and the data produced by economic data releases. So, needless to say, they are a big deal!
Economic Data Primer
Professional traders and money managers spend a lot of their time researching economic data statistics because they provide crucial clues about financial markets and the potential future health of economies. They do this because fundamentals and economic indicators are what move the Forex market a good majority of the time.
In this article, we will refer to economic indicators, data sets, figures, releases, and economic news sets interchangeably throughout this lesson. They all describe the same thing. Different analysts will prefer to use one term over another to describe the same thing which is why we will use them interchangeably. We will look at some of the major economic figures that can and do have an impact on the prices of currency pairs in the Forex market because paying attention to these figures is very important as they will have an impact on your trading.
Some of this information might not be the most exciting right now but it’s all something that you will undoubtedly come across on a daily basis when you are trading in the Forex market. As with all things you will gain a much greater understanding of how these economic releases impact the markets by experiencing them in real-time.
The Importance of Globalization
It was once the case when traders would primarily concern themselves with United States based statistics because, at the time of this writing, the United States is the world’s largest economy and single superpower. However, with today’s globalization of financial markets and the reduction of trade barriers between most countries, this is no longer the absolute case. Globalization is a real thing and here to stay (for now) so traders need to make sure they are paying attention to economic data sets from the other key countries that belong to the currencies they are trading as well. This is particularly true for key currencies such as the Great British Pound, Euro, Japanese Yen, Swiss Franc and the Canadian, New Zealand, and Australian Dollars.
Of course, if a trader is interested in trading emerging currencies such as the Mexican Peso or some of the Scandinavian currencies then they will need to concern themselves with the indicators from those countries as well. The good news is that more and more people are jumping into those currencies so more information is becoming broadly available now.
How to know when Economic Data is Released
Almost all economic data and statistics are published at pre-set times during the month. This means that traders will know well ahead of time what data is coming out as long as they use an economic calendar ahead of time.
One of the best and most simple to use free economic calendars that is one of the most highly used by retail traders is from Forex Factory.
For the most part, traders will want to concern themselves with the data sets that have the impact coloured red. This is not always the case though; sometimes orange impact events will move the markets quite a lot and sometimes there will be red impact events that are not all that important.
For example, at the time of this writing, Forex Factory puts the weekly jobless claims out of the U.S. as a red impact event. However, we have found that this rarely moves the U.S. dollar because it is a “weekly” release and therefore this tends to be a very consistent number and well-known expectation. However, if the market is currently very focused on jobs data of if a central bank is overly concerned with jobs then it very well could deserve to be a red impact colour.
On the flip side, at the time of this writing, Forex Factory colours U.S. Core PCE as an orange impact but this happens to currently be the Fed’s main measure of inflation so it’s actually really important and can have quite an impact on the U.S. Dollar at times.
The main thing is that traders need to be in tune with the market and what the major theme is to understand the impact of any event at any given time. A yellow impact event could be the most important thing that will move prices if that is what the market is obsessing over at that particular moment.
What Traders Need to Know about Economic Data
As a trader there are a few important things they need to know about economic data:
- What data is coming out and when.
- What the market expectations are for that data.
- What the potential impact the release could have on the currencies that will be affected.
If a trader knows the above then they can start to form a bias for their trading.
The Expectations of Data is Critically Important
When talking about fundamental economic releases; what the market EXPECTS is, at the very least, as important, if not more important, than the actual headline number when it is released.
This expectation is very often one of the deciding factors as to which economic statistics are being viewed as significant at any given point in time. For example, if the market is paying close attention to a particular economic indicator then you know that it is likely to be important because traders only want to focus on what the vast majority of market participants are focused on. Traders also want to know why they are focussing on certain information.
The simple thing with all of this is that the market is going to be paying the most attention to what the central banks are saying that they are paying the most attention to. You can really make it that simple most of the time. Generally, if a central bank publicly states that they are heavily monitoring jobs data because they are very concerned with poor readings for example, then the rest of the professional market is going to focus with laser beam precision on jobs data! In this situation, traders probably don't care much about what housing data says because the central bank is not concerned either.
In this example, the market expectation around jobs data is going to create a lot of price movement before the jobs data is actually released. This is sometimes referred to as “trading into a risk event” using the market expectation and can be very valuable to a traders trading. What happens after the jobs data is released will largely be a product of unwinding the expectations based on the actual numbers that were released.
Economic Data and Economic Cycles
It’s important to view economic data developments in the context of trends and cycles. What does this mean? Please see our Wiki on Economic Cycles where we talk about Economic Data and Economic Cycles.
Indicators within the Economic Cycle
Economic Cycles and where we are within them will have a certain degree of impact on economic indicators. Because Economic Cycles are so important to how an economic indicator will perform we have an entire Wiki devoted to these cycles. In this Wiki on Indicators within the Economic Cycle, we will explore Leading, Coincident and Lagging Indicators.
You may also wish to explore the first part of the Wiki on Economic Cycles where we explore Inflation and Deflation as well as The Four Phases of Economic Cycles.
Types of Economic Data
Gross Domestic Product
Gross Domestic Product, or GDP for short, is the total of all economic activity in one country regardless of who owns the productive assets (the things that generate the money). For example, if a Japanese-owned company is making cars inside of the United States then this economic activity will count in the U.S. GDP calculation.
Because GDP is the main measure of total economic activity this makes it very important. It’s the monetary value of all the finished goods and services produced within a country's borders during the specific time period being measured. It includes all private and public consumption, government outlays, investments, and exports minus imports that occur within a country. Put simply, GDP is a broad measurement of a nation’s overall economic activity and health.
GDP is most commonly used as an indicator of the economic health of a country. It’s also used as a gauge of a country's standard of living for its citizens. Since the way of measuring GDP is fairly similar from country to country, GDP can be used to compare the productivity of various countries with a fairly high degree of accuracy.
A nation’s GDP from any time period can be measured as a percentage relative to previous years or quarters. When traders measure GDP in this way, it can be tracked over long periods of time and used in measuring a nation’s economic growth (or lack of growth). It can also help in determining if an economy is in a recession or if it is growing in a way that increases the standard of living for the nation’s people.
Real gross domestic product is an “inflation-adjusted” measure that reflects the value of all goods and services produced by an economy in a given year. This is expressed in base-year prices, and is often referred to as "constant-price," "inflation-corrected GDP” or "constant dollar GDP."
Unlike nominal GDP, real GDP can account for changes in price levels and provide a more accurate figure of economic growth. This represents the total economic activity in constant prices.
It’s significant because it’s useful for tracking how an economy is developing over time. Real GDP reveals changes in economic output after adjusting for inflation. So, if regular GDP was 4% but inflation was 2% for the same time period, then real GDP is actually 2% (4% - 2% = 2%).
This is typically viewed in the context of the overall economic cycle and becomes more significant at certain points within the economic cycle.
Nominal GDP is gross domestic product, or total economic activity, measured at current market prices.
Nominal GDP differs from real GDP in that it includes changes in prices due to inflation. Basically, Nominal GDP tells us the overall increase or decrease in price levels. It’s significant because it describes the total level of production or economic achievement within a nation.
Per Capita GDP (GDP per Head)
Per capita GDP measures the output on a per-person basis. The equation is GDP divided by the population size of the nation being measured.
It’s significant because it’s used as an indicator of overall economic welfare. Output per head can be used as a good guide to understanding the living standards of the nation’s people. If real GDP per head increases it indicates an improvement in the overall economic well-being because people have more money and can therefore increase their standard of living.
Per capita GDP is especially useful when comparing one country to another because it shows the relative performance of each country being measured. A rise in per capita GDP signals growth in the economy and tends to reflect an increase in productivity and economic welfare.
This measures the output for one unit of labour or capital. It’s significant because it indicates the “efficiency” and the “potential” of total economic output.
Productivity is highly cyclical since employment and capital are less flexible and change at a slower rate than supply and demand. If you think about it, demand for certain products can dry up virtually overnight but the manufacturing and employees making the products don’t catch wind of this event until much later because there is a time lag.
“Deflators” measure the difference between the current and constant price GDP and its individual components. For example, if GDP increases by 4% in nominal terms but increases by 1% in real terms then the implied economy-wide rate of inflation is 3% (4% - 1% = 3%). This is an attempt to smooth out inflation readings.
Deflators are valuable for identifying trends and obtaining advanced warning of price changes which is what makes them valuable to monitor for economists
Employment measures the total employment of both regular employees and people that chose to be self-employed.
It’s significant because it indicates the nation’s total current output potential. What this means is that an economy can only produce as many goods and services from all the people who are willing and able to have jobs or work. If there are no more people to work and build things then the country cannot produce any more than what its workforce is capable of producing.
Employment is highly cyclical because when demand for goods and services is on the rise companies tend to increase working hours rather than add new workers to their employed workforce. However, when the economy is in a downturn then companies tend to lay off workers rather than reduce hours worked because letting people go saves a lot more money on things such as benefits that tend to have heavy costs for companies.
Economists watch out for more hours worked and overtime for positive signals of changes in the employment situation. If these start dropping then this could mean that the economy is slowing down or potentially looking at entering a recession.
This measures the total number of people who are out of work but are ready, willing, and able to work if the opportunity to get work presents itself.
Unemployment is highly cyclical for the same reasons that employment is cyclical; they are just the opposite of one another.
It’s significant because it indicates the level of spare labour employment capacity in the economy which economists tend to view as wasted resources. Unemployment is also referred to as "slack" in employment.
There is also a natural rate of unemployment. Companies can only hire people up to the natural rate of unemployment. At that point, demand for employees will become very competitive because there are no more employees to go around. This will in turn start to cause inflation because average hourly earnings and the number of hours worked will go up. This will give people the opportunity to have more disposable income which they may choose to spend within the economy on big-ticket items such as cars and houses causing inflation.
Inflation is interesting because it’s something that central banks are typically concerned with. This is because central banks are tasked with keeping inflation in line with their policies and fiscal mandates. Too much or too little inflation will cause the central bank to be concerned and may force them to take action in the markets.
Personal Income and Disposable Income
This measures the personal sector's total income after government taxes have been deducted.
It’s significant because it’s the basis for consumer consumption and personal savings within the economy. Personal consumption and spending account for between one-half and two-thirds of most developed nations’ GDP which makes this very important.
If people have more personal income then they will likely spend more money within the economy. If they lack disposable income then it’s not likely that the majority of people will be willing to spend what little money they have on anything other than items they must purchase to survive (at least that is the theory). In practice, people tend to just go into more debt when times are bad.
Economists look for sustainable growth on real personal incomes. If it's too rapid then it becomes highly inflationary. If it's too slow then this could possibly become a deflationary environment which is a really bad thing for economies (central bankers do not like this type of environment because they tend to lose their jobs).
Consumer and Personal Expenditure, Private Consumption
These measure personal spending on a per-person basis. Said another way, it’s how much each individual consumes nor how much stuff they buy within the economy.
They are significant because they are a key component of GDP. This follows along from personal income and disposable income because it tells us how much of that money each individual is willing to part with right now to consume the things they need and want. Remember, spending is a very important indicator of the health of developed nations.
Economists look for real percentages to change over time to help them adjust their economic outlook. For example, if spending grows at a rate of 6% and prices only rise 4% then this means that spending has only gone up 2% in real terms.
Positive or negative changes in spending on durable goods such as cars, washing machines, and farm equipment, can be an early signal of changes in the economic situation. More purchases are considered positive while declining purchases are considered negative for the economy.
Consumer confidence measures how people feel about their economic well-being within their home nation. Are people confident or nervous that their standard of living will be maintained, increase, or go down in the near future?
It’s significant because it can determine how people will go about their short-term spending, borrowing, and saving habits.
This is a leading indicator because the more confident consumers are the more likely they are to spend money. And if people are spending more money this boosts consumer spending figures and puts upward pressure on inflation. This is the exact economic situation that a central bank would love to see happening within their country.
If a consumer is not confident in their economic well-being or they think that there is a possibility that they could lose their job then it is reasonable to assume they will cut back on spending. Cutting spending will negatively impact consumer spending numbers and will ultimately cause inflation to weaken over time.
Business Conditions: Indices and Surveys
These indices and surveys measure observational evidence of the business climate. The thing that makes them interesting is that they are surveyed from the perspective of the businesses themselves producing goods and services within the economy.
They are significant because they are a valuable early warning of changes in the economic cycle. They are also important because the information comes directly from the companies that are providing employment. The companies surveyed express their level of confidence which can be a telling sign of their intent to hire more or let go of employees.
They provide valuable evidence of the perceptions and expectations relating to overall business conditions.
Inventory data measures the levels of finished goods that are being held at the factory gate by the producers of those goods. This data also measures the level of inventory that is being held by the distributors on behalf of the producers of those goods.
This type of data is significant because it indicates the level or degree of demand pressures for finished goods. This pressure comes in the form of potential sales.
If there are low levels of inventory then this could potentially indicate that there is more demand than there is available supply. This is a good thing for companies because it indicates that the economy is in an expansion phase and they can now start ramping up production and hopefully have higher profits.
However, this may not necessarily mean great things for the companies. Low levels of inventory could also mean those producers are not optimistic about demand so they are producing less to protect themselves in the event that they can’t sell everything that they produce.
There is a balance that needs to be struck here. This is an indicator that is best used with other indicators to confirm the strength or weakness within a particular economy.
Economists look at the stock-to-sales ratio to judge whether low inventory is a product of not being able to keep up with demand or because the producers of the goods are not optimistic about future demand. If ratios are higher than normal, production imports could potentially be cut unless the demand starts to increase. If the ratios are lower, production and imports could potentially rise unless demand decreases.
Industrial and Manufacturing Production
These data sets measure the value-added output of natural resource mines and manufacturing companies.
They are significant because they are an indicator of the current levels of industrial activity. Most economists believe that industrial production is a broad indicator of the state of the economic cycle for countries that have an established manufacturing sector.
For the most part, all the countries and currencies that retail traders will be looking at trading have well established manufacturing sectors in various states of increasing or decreasing production at any given time.
The output of industries producing capital goods and consumer durables tends to suffer more than other industries during a downturn in the economic cycle. This is because everyday people stop buying things they don’t need to survive, which for most major economies, makes up most of the spending. This in turn leads to more layoffs and job loss which further exacerbates the problems.
Capacity utilization measures how much factories and the machinery used to manufacture goods are being used in developing goods. This is done on a nationwide scale to get a good average on how efficiently companies are operating in producing products.
It’s significant because it’s an indicator of the level of economic output which can give us some clues about inflationary pressures. Strong economic growth with high capacity use suggests there are upward inflationary pressures because the machinery that the country has is being used very close to peak production. Basically, companies are operating efficiently and can’t produce much more goods without adding new machinery and more employees. However, if demand is expected to remain high and interest rates are low, producers may invest in new plant and machinery which can also have an inflationary effect on the economy. Inflation is good as long as it doesn’t get too high.
What it all comes down to is this; are everyday people and companies spending money and expanding? If they are then this is typically good news for the economic cycle because it’s very likely in an expansion phase.
Manufacturing orders measure the total number of new orders received in a given time period by manufacturing companies to produce their goods.
It’s significant because it indicates what the very near-term for potential manufacturing output is within the economy.
In the short term, high levels of orders indicate upward pressure on employment and production output. This may suggest a rise in inflation if unemployment is already low, capacity use is high, or inventories are low. This indicator is typically best used in conjunction with others.
The level of orders can potentially provide an early heads-up of changes in the economic cycle. A rise in orders may signal an end to a recession and a fall in orders may indicate the economic cycle is peaking. But this all depends on where the economy was coming from. The same reading could mean different things at different points in the economic cycle.
This one is pretty self-explanatory. It measures industrial activity involving cars and trucks.
It’s significant because it indicates the level of manufacturing production involving cars and trucks. This can tell us a lot about consumer demand for high-ticket items or durable goods.
Vehicle sales are a reasonable leading indicator because demand for cars is suggestive of personal consumer consumption. On the other hand, van and truck production is indicative of business investment because businesses tend to use larger vehicles for their business operations such as transporting goods around. If more stuff is being bought within the economy then businesses will need to transport more goods from their factory to wherever the end consumer purchases them.
Construction Orders and Output
These measure activity in the construction sector.
They are significant because they indicate new investment and future potential economic output in the form of new construction projects.
Construction work is highly seasonal because it’s obviously easier to complete projects when there is good weather and not when there is a foot of snow on the ground.
Construction activity is very sensitive to the expectations of future demand and to interest rates. This is because positive expectations are what drive purchases of new houses and condos which mostly tend to be financed.
High levels of orders potentially mean demand for building materials and extra labour usage over the coming months. Low levels mean just the opposite.
Housing Starts, Completions, and Sales
These all measure the number of new houses started and finished, total sales, along with existing homes.
They are significant because they indicate the level of construction activity which can be a telling sign of industrial and consumer demand. Obviously, the more construction that is happening within an economy the better the outlook will be for that nation. This also helps to put upward pressure on inflation.
Housing starts imply that there will be demand for raw materials and labour that are needed to make a house. Both of these are closely linked to employment and interest rates.
Completions imply that a possible sale has taken place. For example, this could mean demand for or a new mortgage has already been written. If a new mortgage has been written then demand for consumer durables such as household appliances and cars may increase as well.
Sales are positively influenced by people’s incomes rising and lower interest rates. The more money that people have along with lower interest rates makes it easier for people to buy houses because they have the money to do so and it’s more affordable because of the lower interest rates.
What we don’t want to see is having lots of completions and no sales. This could mean that many building projects will be left vacant and unsold. This situation will put negative pressure on the housing market, banks that hold mortgages, and could increase unemployment. This was part of the situation that happened in the United States back in the Great Recession that kicked off in 2007.
Retail Sales or Turnover, Orders and Stocks
These all measure the most common sales by retailing businesses. Traditionally, a retail business is simply a place where you and I would go shopping to buy our basic necessities and any additional luxury items that we may want.
They are significant because they are a great indication of consumer demand within the economy. Retail sales can cover as much as two-thirds of total consumer spending in certain nations, especially the larger G8 nations.
They are a key indicator of consumer confidence. If consumers are confident with their economic situation this can create extra demand for goods and services because people are more willing to part with their money.
Economists focus on volume increases to help determine if an economy is performing well and decreases of volume to determine if the economy is performing poorly.
Wholesale Sales or Turnover, Orders with Stocks
These measure sales by wholesaling businesses.
They are significant because they indicate consumer demand which we know is a big deal. A fall in wholesale sales or inventories suggests or confirms slack in business and retail demand. Slack simply means that there are spare resources not currently being used that have the potential to be used if demand picks up.
These are not as significant as retail sales but most economists think they are still worth keeping an eye on.
Imports of Goods and Services
These measure purchases made to companies that happened from outside of the company’s home nation. So if a company in Canada bought raw materials from China then this is considered an import of goods in Canada.
It’s significant because it may displace domestic production and put a strain on financial resources. For example, if everyone in the United States is buying German cars such as BMW’s or Audi’s but they are not buying cars made inside of the United States such as Ford’s or GM’s then this will have a negative impact on domestic producers of cars within the United States.
A country typically imports goods and services because it cannot produce them itself. Of course, this is not always exact. People and companies will also buy from abroad if there is a competitive pricing advantage to do so.
The other reason people will buy from abroad is that there is some sort of desirable quality. For example, if you live in the United States and you really want to drive around in a brand new Rolls Royce or Bentley then you will need to purchase that car from the United Kingdom.
Oil is often left out of U.S. figures because it's something that Americans must have and traditionally have no choice but to import because the country has not historically produced enough oil domestically to satisfy its own demand. However, with the advent of new fracking technology, the U.S. is now starting to produce more and more of its own oil and eventually it might be able to sustain its own domestic demand by itself. This is something that you will need to do some research on depending on when you have gone through this material.
Exports of Goods and Services:
These measures sales made by the domestic country to other countries around the world. This is basically the exact opposite of imports of goods and services.
It’s significant because exports generate foreign currency which can help drive economic growth. Sometimes this foreign currency has much more value than the domestic currency and this can add extra revenues to the domestic company’s balance sheets. For example, if a company in Canada sells their product to a company in the United Kingdom then it would receive Great British Pounds on this transaction. This is really desirable because, at the time of this writing, it takes $1.75 CAD to buy 1 British Pound.
Export growth can boost GDP which would have a positive impact on the economy. The greater the proportion of exports a country has in relation to GDP, the bigger the boost will be to domestic output.
Trade Balance, Merchandise Trade Balance
These measure the net balance or difference between all exported goods and all imported goods in the given time period being measured. The big question is this; is the economy importing or exporting more goods? Typically, most countries prefer to be exporting more than they are importing because that means they are making and selling more than they are purchasing.
It’s significant because it shows a country`s fundamental trading position with other countries. Obviously, most countries will prefer to have more exports than imports.
A large trade deficit may tell economists that there are supply constraints which means that companies are unable to meet the demand coming from abroad.
The balance of trade measures the relationship between national savings and investments of the people and the companies of the nation being measured. A deficit indicates that investment exceeds savings and that the use of real resources exceeds the total output from the nation.
Export and Import Prices, Unit Values
These measures the prices of goods that have been traded with other countries.
It’s significant because it identifies cost pressures, potential exchange rate problems, and changes in the environment of business competition.
Economists compare export prices with domestic price indicators to get a feel for the way that manufacturers are passing on cost pressure to foreign buyers.
Economists also look at import prices to judge the level of external cost pressure and to asses these indicators.
Producer and Wholesale Prices
These measure prices of goods at the factory gate. This means these are what it cost the manufacturer to produce its goods before any markups.
It’s significant because it tends to be a leading indicator of cost pressures. Producer prices tell us about the level of cost pressures affecting the levels of domestic production. During a recession, the Producer Price Index (PPI) could possibly overstate cost pressures.
On the flip side of that, PPI may understate prices during inflationary periods because raw material contracts and purchases are typically locked in long ahead of when the final production of the product is complete.
Surveys of Price Expectations
This is a survey that measures manufacturing companies’ perceptions of inflationary pressures. Basically, it measures what company directors are thinking about how inflation is affecting their business right now and into the near-term future.
It’s significant because it’s an excellent look inside the mind of the people who are in the trenches of the manufacturing sector. It can serve as a warning of potential price changes.
Economists tend to look for changes in the trend to suggest a potential increase or decrease in cost pressures.
Wages, Earnings, and Labour Costs
Wages and earnings tell us how much money people are making from their jobs. Labour is the cost to the manufacturer in return for the employees providing their services. These all measure labour costs and influence on consumer incomes.
They are significant because they show both cost and demand pressures within the economy. Wages and earnings are closely linked to where we currently are in the economic cycle. If earnings rise faster than consumer price inflation this means that real spending in the economy is growing well and is indicative of a healthy economy.
Since the great recession of 2007, we have not seen wages rise as fast as costs have which means that people have less money to buy the things they need that cost more money. This is a situation where a lot of debt is accumulated which can be bad for people that live in typical households.
Unit Labour Costs
This measures labour cost per unit of output. Said another way, it measures what its employment costs are to manufacture or produce one unit of whatever product the company makes.
It’s significant because it’s an indicator of cost pressures and the competitiveness of a nation's businesses. For example, if the company is manufacturing in a country where employment costs are extremely low then selling their products abroad, means there will be much more potential profit for the company. On the other hand, if the company is manufacturing in a country where labour costs are very high then this has the potential to not be as competitive against other countries with lower labour costs.
This is a key indicator of the efficiency of labour. If unit labour costs fall, the same output of products can be produced for less money because what the manufacturer has to pay to the employee is cheaper per unit. This of course will help the manufacturer increase its competitiveness. But if labour costs go up then this could reduce the economic viability of certain companies because it just costs too much to build its products. Obviously, the company needs to make money to stay in business so lower costs are always preferred.
Consumer or Retail Prices
This measures the price of a basket of goods and services that a standard household is deemed to need to meet its basic living standards. These are things like clothing, food, rent, transportation expenses, etc. Think about the things you need to eat, sleep, and generate enough money to survive.
It’s significant because it indicates the level of inflation that is experienced by a typical household in the particular nation being measured.
The question to be asking is; is it costing more or less to buy my basic standard of living items overall? Does the consumer have more or less money in their pocket after this year versus last year? The answer to this can tell us a lot about what direction the standard of living is heading and where we are within the economic cycle.
Overview of Economic Specific Indicators
Economic indicators form the backbone of all trading analysis for both central banks and the traders that follow Central banks. Understanding how economic indicators work and how they impact the Forex market is an absolute must if you are thinking about applying some fundamentals and sentiment to your trading. No other place is this more true than in the Forex market.
Why are economic indicators are so important to the Forex market? Well, if economic indicators are what the Central banks use to adjust monetary policy, and if monetary policy is what big money traders are using to direct their trades, then surely it makes perfect sense for retail traders to try and get into any moves caused by central banks actions as early as possible.
Note: We have used the term risk event interchangeably to describe an economic indicator that has the potential to move the market or create risk throughout the rest of this article.
Trading with Specific Economic Indicators
So how is this done? Traders do this by analyzing specific economic indicators in order to try and work out how the central banks will react to their individual readings. Most central banks will tell the market exactly which indicators they are focussing on or concerned with. This makes the job of the much simpler in determining which indicators are important at any given time.
Forex traders are always waiting for central banks to act in a specific way rather than simply waiting to see what they did do after they already did it. This is called trading with “Market Expectations”. Traders determine market expectations by following the hints and clues from central banks about monetary policies and the economic indicators that they are following to enact those monetary policies. These hints and clues are known as forward guidance.
As you can probably imagine, once you start to get a good feel for each central bank and how they focus on each economic indicator you can look to position yourself well ahead of certain economic releases and central bank events. This is because you can get a good feel for what their next steps will be based on what the central banks themselves have said to the market in the recent past. They will almost always express how they feel the indicators have been performing and whether that performance is in line with their desired targets.
Some of the best sentiment trades are trading with the market expectations going into a scheduled event a day or two prior to the release. These are often the least stressful and most profitable trades. An example of a trade with the market expectations is when the market thinks a central bank will hike or cut its interest rate. The market will attempt to price that information into the currency in the weeks running up to the central bank announcement. These are generally the best sentiment trades with the highest reward. Waiting for the actual interest rate decision will still provide trading opportunities but that will all depend on what the central bank actually does.
If the central bank does as the market expects then the reaction could be muted or even the opposite of what you would expect to happen. This is because the smart traders that were already in will book profits causing the price to illogically go in the opposite direction.
If the central bank doesn’t do what the market expects then there will be an immediate unwinding of all the previous bets that were made in the run-up to the event.
Another example is if a central bank is focused on inflation right now then traders will obsessively track inflation related data. If they switch their focus to wage growth then traders will follow along with wage growth indicators. By doing this traders are constantly tuned in with what the central banks are presently concerned with which allows them to get a head start on what actions they might take.
Specific Economic Indicators
Growth Domestic Product Expanded
We have already looked at GDP above. What we will do here is break it down a little more to fully cement your understanding of it. If you are a little fuzzy on the details you can go back and check out the section on GDP above.
GDP is a growth indicator. It represents the big picture of economic health in a particular nation. This obviously makes it extremely important to all central banks.
By understanding this indicator traders will also start to understand what makes up a healthy economy. This will give some insights into what makes each component of GDP tick.
The biggest thing to bear in mind about GDP is that it helps you think about how the economy behaves. Having this kind of insight when trading financial markets gives you a major advantage over that of a typical retail trader. When you have been around long enough to see how GDP related figures affect individual currencies you will start to have a natural intuition of what kind of numbers will have what type of impact on the market.
GDP represents the total production of a country. Measuring total production can be tricky, especially for larger economies that have many moving parts. However, we can try to simplify this by breaking it down into 3 ways to calculate it.
- Adding up the total spending in the economy.
- Adding up the total income earned by the economy.
- Adding up the value added at each step of production and distribution.
When analyzing GDP data the markets tend to pay particular attention to the annualized quarterly percentage changes for overall GDP and its major components. What does this mean? Most countries will release GDP data quarterly but in an annualized format. So if the U.S. quarterly GDP comes out at 2.1% this does not mean that inflation is 8.4% for the year. 8.4% would be 2.1% X 4 quarters. What 2.1% means is that all 4 GDP quarterly numbers for a year are divided by each other to come out with a 2.1% growth forecast for the entire year. This is an attempt to make the data less volatile due to seasonal fluctuations because winter and summer GDP readings can sometimes be much different.
On the other hand, there are other countries that release their GDP numbers in a quarterly format rather than in an annualized format. This means that if the next 4 quarterly numbers come out as 0.4%, 0.5%, 0.7%, and 0.5% then the annual rate of inflation as measured by GDP is 2.1% which would be acceptable for most central banks. In this case, you would simply add the 4 quarterly readings to come up with the annualized number (0.4% + 0.5% + 0.7% +0.5% = 2.1%).
Then again there are other countries that release their GDP data monthly. Some countries will release the GDP data as “Advanced or Preliminary”, “Secondary”, and “Final”. The way GDP is calculated is roughly the same but it can take some time to get to grips with how individual countries release GDP statistics.
You can get all this information by going to the Forex factory calendar and clicking on the folder icon next to the GDP event. In there it will tell you how the particular country releases its GDP data. This is probably the easiest way to get the info you need fast. Actually, you can do this for any economic indicator to get a bit more of a flavour for the economic data that is to be released.
Most traders are referring to real GDP when they talk about GDP but it is worth understanding the distinction.
Consumer Price Index (CPI)
CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services such as transportation, food, and medical care. CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them out. The goods are also weighted according to their importance. Food would have a higher weighted average than cloths would for example. You need both but you will die without food whereas you can live naked as long as you are well-fed!
Changes in CPI are used to assess price changes associated with the cost of living. This is important because we all need to buy these items to live in modern society. If prices are going up then the things you need are taking more money out of your pocket which could make your financial situation a little bit tougher.
CPI can be casually termed as inflation. Most developed nations try to keep their CPI reading between 2% to 3% over the long run.
If CPI reaches or exceeds the upper band of this range then the central bank will likely increase interest rates to balance growth and try to slow inflation down by making the costs of borrowing higher.
Conversely, if it comes in at the lower end of the range the central bank will likely cut interest rates to try and spur growth and CPI. This incentivizes people and companies to borrow and spend.
CPI readings outside of the central banks target range can be either very bullish or bearish depending on what it might lead the central bank to do. Traders will be listening out for the central banks to tell them how they feel about the current path of CPI and looking to trade in line with that outlook.
Non-Farm Payrolls (NFP)
This is one of the most famous U.S. economic figures that absolutely dominates the global FX market. If you are serious about learning economic data but don’t have a lot of time to devote then just learn this one figure inside and out. It almost always provides excellent trading opportunities and creates lots of price volatility that traders need to get the prices moving.
This figure is released on the first Friday of each month. Depending on how much weight the Federal Reserve is currently placing on employment data this can be the biggest market-moving data release of the entire month. Most of the time it is super important because jobs are almost always on the mind of central bankers.
It measures the rate of employment in the U.S. economy for the largest sector of workers. Despite the name non-farm payroll, the report excludes workers from general government jobs, private household jobs, employees of non-profit organizations, and farm employees. But it does measure most of the jobs within the U.S. economy.
It’s important to note that NFP does not always move the market in an aggressive manner. Some months it can be an unimportant event. But when the market is focussing on NFP, which is a good majority of the time, there is not much else that can impact the pricing structure of the FX market more. This makes it one of the most exciting figures to trade.
Of course, this type of figure is very important for gauging the overall health of the U.S. economy and as a result, it can give traders clues as to the next interest rate move from the Fed.
For example, if NFP has recently missed expectations many times and is falling then we can assume that the Federal Reserve will take note of this. If this trend persists over a long enough time then the Fed will very likely step in at some point and try to stimulate the jobs market. They would most likely start by lowering the interest rates which we already know will have quite an impact on the USD.
The best way to trade NFP is to first research how much importance the market is placing on it for the given month and then position yourself accordingly.
Average Hourly Earnings
This is sometimes referred to as “Average Earnings Index” in certain countries such as the United Kingdom.
This is important because it tells you very directly which way employment earnings are heading. If earnings are going up then on average people have more disposable income which they may choose to spend within the economy. This makes it a leading indicator of consumer inflation. And we know just how important consumer spending is to most developed nations.
This is the change in the price that businesses have to pay for labour (employee’s average hourly wage). Employment is one of the largest costs of running a business. Of course, companies want to pay less for labour because it will help them make more profit from the products that the business produces and sells. This makes them more competitive, especially if they are exporting companies. But in the end, a central banks mandate is to the people and they want to see this indicator rise steadily over time.
Another reason that it is important is that it is the earliest inflation-related data released each month in the United States. This can give traders some clues as to where inflation might be heading over the short to medium-term.
In the United States, this data is released at the same time as NFP and the Unemployment Rate. So sometimes this can be just as big a deal as NFP itself depending on how positive or negative the number comes out.
For example, let’s pretend that NFP comes out at 200k and was expected to come out at 200k. No deviation here to trade from and you might expect the price of the USD to go nowhere. However, you see the USD starts getting hammered lower for example. You then notice that average hourly earnings came in at 0.0% when the expectation was 0.3%. Bang! That is exactly why the USD is dropping now in this example. The market shifted its focus to average hourly earnings because there was nothing to trade from the headline NFP number.
This is a common scenario on both the positive and negative sides. Sometimes trading economic data is not as simple as watching one indicator. Sometimes you need to know the relationship between other indicators as well.
It is advisable to do some research to see how much weight the Federal Reserve is giving to wage inflation data at the current time. Most of the time they consider it to be a big deal and so will the market in general.
In its most basic form, the unemployment rate is the percentage of the total labour force that is unemployed but who are actively seeking employment and are also willing to work if the opportunity should come up.
The unemployment rate is very often used by central banks as a short-term target while they are managing monetary policy. This means any changes in the unemployment rate will be really important to traders.
Unemployment occurs when a person who is actively searching for employment is unable to find meaningful work. It is often used as a measure of the health of the economy. The most frequently cited measure of unemployment is the unemployment rate which is the number of unemployed persons divided by the number of people in the workforce. This equation gives you the percentage of people who are unemployed.
As we have already mentioned, employment figures not only display the overall headline but also a plethora of other data that is digested by the markets. There are many times where the other data inside each report can overtake the headline itself in importance and is worth keeping an eye out for.
A steady rise in unemployment is never good and can indicate a worsening of the economic situation for the country reporting it. This can cause consumer spending to drop which generally leads to weakness in the local currency.
This measures the value of imported and exported goods and how they compare to each other for the given period of time being measured.
When imports and spending exceed exports and earnings the country is said to have a trade deficit. A trade deficit is generally considered a negative thing because it means that money is literally flowing out of the country.
When exports and earnings exceed imports and spending the country is said to have a trade surplus. A surplus is generally considered to be a positive thing for the country and particularly for its currency. The reason for all of this is due to demand. If the demand for a country’s exports is high then the exporting companies will likely make more money. These extra earnings can add to growth in GDP which, as we know, is pretty important.
For example, if the UK is exporting lots of goods to foreign countries, those foreign countries will need to purchase British Pounds in order to buy those products. This can obviously have a potentially positive impact on the British Pound if it is done in large enough quantities. Vice versa if UK citizens are buying most of their products from abroad then they will first need to sell their British Pounds in order to buy the local currency where they are purchasing from. Again, this can cause selling pressure on the British Pound over time. This has an impact on the overall trend in currency values relative to each other.
Large traders know this so when figures like trade balance show that some kind of trend is possibly forming they will immediately try and get in first causing an initial wave of movement right after the figure is released. This comes with the caveat that the trade balance needs to be important to the market at the time it is being released.
This measures all of the money coming into the country versus all of the money flowing out of the country. Basically, the current account is the difference between the nation’s overall savings and its purchases/investments.
The current account is an important indicator that tells us about the health of a particular economy. It’s the sum of the balance of trade, net income from abroad, and net current transfers out of the country.
A positive current account balance indicates that the nation is a net lender to the rest of the world, while a negative current account indicates that it is a net borrower from the rest of the world. Said another way, a positive current account reading indicates that a lot of capital is flowing into the country which could strengthen demand for the local currency and see it rise in value. A negative current account means that capital is flowing out of the country which means there is less money available in the home nation.
Producer Price Index (PPI)
PPI is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services.
PPI measures the percentage price change from the perspective of the seller of the goods. This differs from other indicators such as CPI which measures price change from the perspective of the purchaser or consumer.
The PPI looks at three areas of production:
- Commodity-based demand
However, the headline number takes all these into the calculation as equally important, so traders only need to focus on the headline reading rather than the individual components because they are all equally weighted.
Traders follow the trend in the PPI numbers which are released monthly. If we see that PPI is increasing steadily over several months it is reasonable to believe that the economy is performing well and that future interest rate hikes might be in the cards. This situation could potentially create demand for the currency.
On the other hand, if PPI is showing that it is trending lower over several months then the central bank may become concerned about inflation. If other inflation-related indicators start showing weakness as well then the market might start to think that interest rate cuts are in the future. This could potentially devalue the currency.
This indicator tends to have a lot of revisions. This is because it takes into account seasonal food price fluctuations and the highly unstable nature of energy prices such as oil.
This measures the monthly raw volume produced by industrial firms such as factories, mines, and utility companies.
This indicator is a bit different in that it has a “reference year”. The reference year for this economic indicator is 2002. This means that every new reading we get will have its levels compared to 2002. Full industrial production within an economy is pegged at a reading of 100. So the closer the reading is to 100 the better the economy is performing.
Industrial production can reflect the tone of the overall economic activity in most modern nations. A positive reading is generally considered to be a good thing for the local currency while a negative reading tends to be not so good.
Industrial production is related to capacity utilization and is considered to be a coincident indicator. This means that changes in the levels of these indicators usually reflect similar changes in overall economic activity very close to the time it is released. It’s a more efficient indicator than other coincident or lagging indicators.
ISM Manufacturing Index
ISM stands for Institute of Supply Management. This is a U.S. data point only. The ISM Manufacturing Index is one of the first pieces of news released each month, so it has the potential to influence the tone of investor and business confidence.
The purpose of this index is to monitor employment, production inventories, new orders, and supply deliveries. This information is then interpreted into a “composite diffusion index” that monitors overall conditions within the industrial industry. The diffusion index simply means that it shows how all of the indicator components are moving together with the overall indicator index. It is a way of visually smoothing out an index that has many moving parts to it which ISM manufacturing does.
This is important to the Forex market because it’s composed of a survey of more than 300 large and important manufacturing companies. This gives a very good overview of how manufacturing companies are feeling about the current economic climate.
It’s also a survey of the purchasing managers who have control and influence over their companies' supply chains. Manufacturers need to respond quickly to changes in demand because they need to ramp up or scale back purchases of the stuff they need to make their products to match the current demand from the market. They do this to ensure the company’s continued profitability. As a result of their position in the company, they are perhaps better positioned than anyone to speak to the ebb and flow of current business conditions.
The reason that traders watch this indicator carefully is that the Federal Reserve tends to place great value on it at certain times in the economic cycle. This indicator becomes more widely watched when the economy is trying to get moving after a slowdown. The Fed uses this information to form part of its opinions which leads to central bank decisions and actions on monetary policy.
Durable Goods Orders
Durable goods are generally considered to be something that has a fairly long and useful life after being purchased. For example, cars, trucks, and washing machines could be classed as durable goods because they are something that people use for many years before they need to be replaced.
Think about durable goods like this; a car is a durable good because it is meant to last many years. The gasoline you put in the car's tank is a non-durable good because it has a very short usable life. If you turn on the car and drive a couple of miles then you have burned off some gasoline but the car will be no worse for wear as a result.
This is an economic indicator that is released monthly by the Bureau of Census. It reflects new orders placed with domestic manufacturers for delivery of these durable goods in the near term future.
Durable goods come in two releases per month:
- The advanced report on durable goods
- Manufacturers’ shipments, inventories, and orders of durable goods
The problem with durable goods is that it can be quite volatile and tends to see plenty of revisions. In the short term, it can impact the markets and move prices but typically only if the Fed is paying close attention to manufacturing. For this reason, traders should keep an eye on these data points and understand where the country is within the economic cycle.
Housing Starts and Building Permits
Housing starts are the number of new residential construction projects that have begun during any particular month. The New Residential Construction Report, commonly referred to as "housing starts," is considered to be a very important indicator of economic strength.
Housing start statistics are released on or around the 17th of each month by the U.S. Commerce Department. The report includes building permits, housing starts and housing completion data. Surveys of homebuilders nationwide are used to compile the data and are cross-referenced from the permits that have been issued by municipalities.
Building permits are a type of legal authorization that must be granted by a government or another regulatory body before the construction of a new or existing building can take place. The U.S. Census Bureau reports the finalized number of the total monthly building permits on the 18th work day of every month.
These particular figures are heavily influenced by the level of mortgage interest rates. Mortgage rates are largely influenced by central bank interest rates because the financial companies that lend out mortgages need to borrow from the central bank first and then lend out mortgages at a higher rate to make a profit. This will be watched carefully by FX traders to see if there are any trends in place or developing over time.
New Home Sales
As the name implies, new home sales are an economic indicator that measures sales of newly built homes. This includes houses, condos, townhomes, and any structure that requires a permit to allow people to live in them.
It’s released monthly by the U.S. Department of Commerce’s Census Bureau and includes both quantity and price statistics.
It’s considered to be a lagging indicator of demand in the housing market because permits are issued a long time before the structure is finally completed and sold. For larger projects such as condo buildings, this can take several years.
High readings are considered indicative of a strong and growing economy. Low readings can indicate that the economy is stalling out or even moving into a recessionary period within the economic cycle.
You will also see this positive or negative tone reflected in the prices of home-building stocks. If there are plenty of sales then the home building stocks will likely have a strong balance sheet which would boost the share price as investors buy them up to join in on the positivity.
Consumer Confidence Index
This is a United States figure and is similar to the ISM report in that it’s a survey of several thousand people. However, this is a survey of normal everyday people rather than businesses. Other countries do have their own version of consumer confidence but they tend to be calculated differently or are included inside of other indicators.
This is considered important because consumer spending is a very large factor that affects the GDP reading for most modern developed economies. If this index is really positive then it could possibly indicate that significant growth may follow. If you think about it, if everyday people are very positive then they are more likely to spend their money rather than save it. If they do go ahead and spend their cash it will in turn help grow the economy if enough people are doing it. This means more spending in the economy and more demand for the U.S. Dollar which could in turn strengthen the USD over the long run. The opposite is true if the number is overly negative because if people are worried about the economy and their job security then they are more likely to save their money rather than spend it. If people are saving their money then this is not going to help local businesses prosper and lower profits will filter into a negative reading for GDP.
This index is released on the last Tuesday of each month and is a barometer of the health of the U.S. economy. It is also based on consumer perceptions of the current business and employment conditions, and expectations of those two plus personal income for the next six months.
IFO Business Climate Survey
This is a German indicator and is similar to ISM in that it gauges the sentiment of the business climate in Germany.
It is widely followed as an early indicator of the state of the German economy. It’s based on a survey of approximately 7,000 monthly survey responses from firms in manufacturing, construction, wholesale and retail.
As the largest economy in the European Union, Germany’s business climate has implications for the rest of the European Union. This gives a good reading about the overall economic health in the Eurozone as a whole because other large European nations such as France have similar business climates.
A growing IFO reading signals growing optimism which in turn can lead to a strengthening of the Euro over time if there are other fundamental economic reasons to be buying the Euro as well.
GDT Price Index
GDT stands for Global Dairy Trade. This is an indicator that is unique to New Zealand that is released twice per month.
It represents the change in the average price of dairy products that are sold at auction. It’s derived from taking a weighted average price of the 9 dairy products that were sold at the current auction then the new number is compared to the previous releases. The new reading is then expressed as a percentage gain or loss from the previous reading.
This is important because it’s a leading indicator of New Zealand’s trade balance with other countries. Dairy sales happen to make up a large percentage of New Zealand’s GDP which is another good reason its reading can have an impact on the price of the New Zealand currency.
Rising commodity prices will help boost export income while falling prices will give a decline in export prices. If the Percentage change is showing a trend of positivity then this could have a positive effect on the New Zealand Dollar. If the trend is looking not so good then this could weaken the New Zealand Dollar over time. Any significant deviation could produce a sharp move in New Zealand currency pairs.
This piece of data can be a bit tricky because they do not give you a time for when the actual figure will be released. They only give you a date. So you will need to have a decent audio squawk on if you want to hear this release as fast as possible. But if you do see a sudden price spike in New Zealand currency pairs on the date that this is scheduled to be released then it is time for you to hunt for that information to see what the numbers were.
A note of caution about this indicator: There are times when the market will be very focused on this piece of data. But at other times it will not produce the slightest of price movements regardless of how big a deviation it produces. This is one that you will need to know if the market has been giving any weight to it if you are going to trade it.
Crude Oil Inventory Numbers
This is an American indicator but it tends to have more of an impact on the Canadian Dollar. This is because, at the time of this writing, Canada is the number one exporter of oil to the United States. Oil profits also make up a large percentage of Canada’s GDP so these numbers can be very important to the Canadian Dollar.
This indicator measures the change in the number of barrels of crude oil held in reserve by commercial firms during the previous week.
The way that traders look to trade this is when there is a big drawdown this could cause the Canadian Dollar to strengthen. This is because if there is a lot less oil in reserve then it is natural to assume companies will need to buy more to keep up with their demand which could push the price of oil higher. Basically, if the price of oil goes up then Canada’s oil companies will make more money which will contribute to a higher GDP over time.
If there is a large build of oil then traders will look to potentially short that Canadian Dollar because the chances are that there will be less production from Canada and therefore fewer profits.
You need to take some caution here and not blindly trade a correlation you believe should exist. The reality is that this indicator may or may not have an impact on the Canadian Dollar. It really all depends what is happening with the price of oil at the specific time. If volatility is high with oil prices then it might have more of an impact as a general idea.
The Canadian Dollar tends to be impacted by the price of oil when people are panicking about oil and the price is going down hard. The key is that oil prices need to be volatile to move the Canadian Dollar around significantly.
The market tends to be able to only focus on one or two things at a time when it comes to a specific [[currency] or commodity. For example, during much of 2017, there was a decent correlation to oil prices and the Canadian Dollar. It wasn’t perfect but it was there. This was because there was not enough going on in Canada at that time to have traders only focus on events going on within Canada. So they would trade the CAD in line with oil.
This is an indicator that you will have to be in tune with if you are thinking about trading along with it.
Economic Indicator Wrap Up
All of these figures are watched closely by the markets but the overall thing to bear in mind with all risk events is that the market will only pay attention to the ones the central banks are currently paying attention to. Central banks are typically only ever focussed on one or two types of indicators at any given time which can make a traders job fairly simple.
For example, if the Fed is focused on inflation with no regard for other data points then NFP will likely create no significant moves across the FX market. If on the other hand, the Fed is data dependent with a major focus on labour conditions then NFP will be one of the biggest data releases of the month. This same principle applies to all [[[central banks]] and data points around the world. This is perhaps the most important thing to bear in mind if you are trying to position yourself in the markets around key risk events.
Economic Indicator Pre-Trade Considerations
When incorporating economic indicators into your trading routine there are 4 major things that you must consider:
- The key number from the economic indicator announcement itself. This is frequently referred to as the headline number.
- Analysis of the indicator or an understanding what the indicator means.
- The overall consensus forecast by professional analysts before the announcement.
- The live-streaming news feed that accompanies the release. If you are just starting out there are plenty of free ones but some of these will be slightly delayed news feeds.
When it’s time for the economic release you will hear the indicator announced via the news feed by an audio squawk first which will then be followed by a text headline with some extra analysis provided by a professional analyst. There are a couple of really good premium paid audio squawk servicesthat can really add an extra layer of profitability to your trading.
One of the most important factors of any economic indicator is the expectation or the consensus for the actual figure. This is what expert analysts and economists think the indicator will show for the given period we are looking at. For example, will the figure come out better than the previous month or worse, and if so, how much better or worse? Traders can then use this number to base their expectations.
We want to know what these expert analysts and economists think the number is going to be because it's literally their job to go through all the literature, analyze the bureau of statistics and government agencies, and spend their lives tracking and following this data. That's why these analysts exist, to feed us quality and well-thought-out expectations so that we can get a good idea of what is likely to happen with the data.
These consensus numbers are generally gathered by the main news companies such as Reuters, Bloomberg, MNI, etc. These are the companies that actually employ some of these analysts and economists. The consensuses are designed to get an average view across a wide range of different economic experts. The idea behind this is so that the data is more balanced and hopefully more accurate.
Along with these numbers the analysts also provide consensus for a high and a low figure. These high and low figures give traders a range in which to set their expectations. Traders can then use this information to potentially position themselves ahead of the event.
Think about this for a minute, professional traders do not generally trade the news as it’s released but rather they get in based on what they think might happen with the release in the days leading up to the actual release. They are attempting to price in the expectations for the upcoming news. They do this by using expert analyst expectations. This is what we call "trading into a risk event".
Another factor to keep in mind is that the markets will very often pay attention to the numbers behind the headline number. This explains times when you might get a really good headline figure, the currency pair rallies, but then the price seems to go the wrong way based on the positive headline. This can be frustrating but there can sometimes be negative things inside the figure which mean that despite the seemingly positive headline things are not actually as good as it seems.
This concept can apply to almost any type of figure and to illustrate it we will use the example of employment data.
Let’s imagine that the analyst expectation for the headline figure was 200,000 jobs created. The employment numbers beat the market expectations by a wide margin by coming out 300,000 jobs created instead of 200,000. This shows that more people have jobs than economists expected. You might think this is a very positive thing and the currency should rally which it probably initially will. However, if you look deeper into the numbers and you find that it’s made up of 400,000 part-time created and a loss of 100,000 full-time jobs while at the same time average wages have dropped dramatically then this is actually bad news because the overall standard of living for the people of the country will fall. Having more employed people is positive but having 1 person gain a new full-time position is worth at least 5 new part-time positions in economic value so the markets will obviously want to see the majority of jobs created be full-time jobs. So if we lost 100,000 full-time jobs then this is not going to be made up by the gain in part-time jobs. This is a negative release that looks positive.
This makes the headline alone not enough to tell us if the news was good or bad for the currency or economy as a whole. This is a classic situation where we get a good headline number but the finer details show that the price will go in the opposite direction. As a trader, you need to be aware of this so that you can quickly digest all of the analysis before deciding how you will trade a particular event. But don’t worry; the news feeds will alert you to the figures behind the headline almost immediately after the initial release.
Tier one data points are, for obvious reasons, more important than tier two data points. This means that the market will generally react far more to tier one data. However, in certain circumstances, this may not always be the case.
For example, if the entire market is really concerned about oil prices and the impact that falling oil prices will have on inflation or a particular economy then this suddenly makes oil inventories much more important at that moment. This can be true even though oil inventories are typically considered to be a tier two data point. If the oil inventories show an oversupply of oil then this means potential further declines in price possibly leading to lower inflation and possibly the central bank cutting its interest rate. This sometimes happens for countries that are heavily dependent on exporting oil such as Canada. However, if the price of oil is stable then the Canadian currency will likely ignore oil as a leading pricing indicator for the Canadian currency.
As you can see, a lot of analysis is formed from the starting point of what the market is focussed on most of the time. This is crucial to have in mind if you are to become successful as a trader over the long run.